Don’t Even Think This Ship is Sinking: Re-writing Economics in The Age of Global Inter-Dependence

May 15, 2009 11:27 PM ET

Recently many academics were warning of the impending decline and probable catastrophic collapse of the United States economy, of course with the rest of the world economy going down the drain as well. People like Paul Krugman are throwing their weight behind such opinions, a Noble Prize winner and a Princeton University professor of economics. Nouriel Roubini of New York University is repeating the same mantra again and again.

Now, there is a powerful and strong justification of such a gloom and doom ideations. Not just the street is having one seizer after another, but the forecasts of the future don’t seem quite promising to say the least.

History showed us that economists never made great forecasters. But why should we judge them by their past? Well, because economic theories are built on situations that experienced a huge shift since they were developed. The world has changed since “The Wealth of Nations” that is the foundation of modern economics and was published in 1776. Two great world wars preceded by the industrial revolution and a new shift in the world balance of power not once, not twice, but three times. A new emergence of a global economy with such ties and co-dependency that exceeded the most wild an 18th century thinkers, what is more, a new age of information has begun where not only economies were influenced by large scale events, but by a single headline in the internet highway. Here is a situation were companies becoming mini-governments and in sometimes single company revenue would exceed the revenue of a small bundle of developing nations. This new world was not foreseen when the modern economic theory was developed. The world is experiencing new reality with complacency in the positive and negative sense is the byproduct of this reality and it, not economics will influence the final outcome of this crisis.

George Freidman wrote “The Next 100 years: A forecast for The 21st Century”, a thought provoking text that came at no surprise as it made a lot of sense in the context of the “real world” as we don’t want to see it, either due to humbleness, guilt, or simply ignorance.

The U.S is certainly not Argentina. In the bigger picture, the geopolitical realities place it in a completely different place than even China, Russia or the EU.

The U.S economy is a special new case not just with its global dominance and size, but because of the unique fact that the U.S resides in the heart of the world’s economic engine.

While many nations’ economies are built with the U.S being their primary markets, others have substantial investments in the U.S. From China and the rest of Asia to the Middle East and its powerful Gulf states to the EU, it seems that those vital and deeply rooted co-dependencies and interests won’t make this ship one to allow sinking, provided the catastrophic waves that will result.

The huge debt that many are crying will weigh the U.S down is actually a fascinating case of how the relationship between China and the U.S would produce eventually (at the gate of the global economy rebound) a new scenario; a special new grand case to study by the same economists who are crying today, and with new conclusions that will contradict their current assertions.

This is not an attempt to assert that geopolitical, military and economic weights would change many equations of what we seem to think to be sacred economic “facts”. No, not at all; this is an assertion that these economic “facts” are changing just as many economists are trying to assert them today.

Let us examine one piece of evidence that is perplexing. Think about this: when a nation is in deep economic recession, printing money, taking in more and more debt, how come that its currency keeps rising? Now, we all heard about “the flight to safety” reasoning, but if you buy that, then you automatically buying that the U.S economy is safer than any other economy in the world today, right? Ok. Then, we both agree.

Now, you may say, but things just started getting worse, the dollar will be pressured and soon it will start going down. Again, I can not agree more, but for a totally different reason. The dollar was kept weak in the past and will be in the future to stimulate and compete in the global market. Yes, the dollar will go down, because it is the US best interest that it should go down not because it has to by other forces.

Two reasons could have made the dollar stay high. One is the old “flight to safety” another is “flight to a higher value during a crises”. It just makes sense to keep the dollar high to prevent capital flight during fearful times and to discourage speculators who may wish to try to benefit from the situation including those on the level of governments and not just institutions. This realization that was not a puzzle for informed investors lead to this flight in rather out and hence, the dollar held high. Let us remember that such action is quite welcomed by many nations as the dollar is the main reserve currency in the world as we all know. The rich oil Gulf nations, and China are probably among the most supportive of such policy.

My hunch is that this crisis will write new rules and produce new realties of how the new inter-dependent global economy through its complacency was able to turn the early 21st century global economic crisis into a great economic rebound. I am just an optimist, so shoot me.